Latin America

Economic Snapshot for Latin America

January 20, 2015

Growth picks up in Q3, but falling commodities prices pose challenge going forward

Economic growth picked up pace in the third quarter in most of the economies in Latin America, according to more complete data. The regional GDP estimate showed that the economy expanded 0.6% annually (previously reported: +0.7% year-on-year), which marked an improvement over the meager 0.1% increase tallied in Q2. The economies of Bolivia, Mexico and Peru accelerated, while just three economies, Argentina, Brazil and Venezuela, contracted. In Latin America, the ongoing drop in oil prices has affected oil exporters such as Venezuela, while it has helped oil importers, such as Chile. The fall in oil prices is will also reduce the value of oil reserves in Argentina, Brazil and Mexico. Moreover, as the production of commodities is significant in the region, the drop in prices for other products, including copper, grains and iron ore, will pose additional challenges for many Latin American economies.

During the outset of 2015, the fall in most of the region’s exchange rates that was observed at the end of last year has become more pronounced. Many major Latin American currencies depreciated in the last months of 2014 in step with the global strengthening of the U.S. dollar. In addition, the sharp weakening of most currencies in the region was exacerbated by the continued fall in global oil prices. The Brazilian real lost 12.5% of its value against the U.S. dollar in annual terms at the end of 2014 and the Mexican peso weakened 13.1% annually. Sharp drops against the greenback were also recorded in the Argentinean, Chilean and Colombian pesos, which plunged 29.8%, 15.5% and 23.8%, respectively, at the end of 2014. Consequently, most Central Banks and monetary authorities kept their policy rates on hold (Brazil and Peru were the only exception) and many are intervening in the currency markets to smooth volatility. Meanwhile, in Venezuela, where economic policy is erratic, the official exchange rate remained stable at the end of 2014. The Venezuelan bolivar traded in the unofficial market, however, experienced significant plunges due to a lack of foreign exchange and deteriorating economic conditions in the country.

Outlook continues to disappoint as oil producers prove to be weakest link

The economic outlook for Latin America deteriorated again at the outset of 2015. January’s result represented the seventh consecutive month in which panelists surveyed by LatinFocus downgraded the region’s growth prospects. Forecasters cut 0.4 percentage points from last month’s forecast and now expect GDP to expand 1.5% in 2015. This month’s downward revision reflects lower growth forecasts for 9 of the 11 economies surveyed. Panelists left their growth estimates unchanged for Paraguay, while Argentina was the only country for which panelists raised their projection. For 2016, panelists see Latin America’s GDP increasing 2.8%.

In the wake of the persistent fall in oil prices, the outlook for energy producers is less positive this month. The sharp drop in oil prices has compounded the difficulties that Brazil and Venezuela are facing. Venezuela saw a notable cut to its forecasts and is expected to experience an outright recession in 2015. Economists were prompted to lower Brazil’s already lackluster growth projections due to the steep fall in oil prices and the corruption crisis in oil producer Petrobras, along with rising concerns that the government will not be able to rekindle growth. Meanwhile, the more positive outlook for other energy producers in the region was also cut this month. Colombia’s growth projection for this year, albeit still robust, was revised down, while Ecuador saw a sizeable downgrade to its 2015 projection. Panelists also cut Mexico’s economic prospects on expectations of lower oil prices along with increasing doubts that the Mexican economy would be able to reap the benefits of an upturn in the U.S. economy. Argentina’s growth forecast for this year was revised up, although forecasters still expect that the economy will experience recession for second year.

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BRAZIL | Economic growth at end of 2014 undershoots expectations

The Brazilian economy expanded meagerly in the third quarter of 2014 and more recent data suggest that the economy struggled in the final quarter of the year. In November, economic activity recorded zero growth and industrial production contracted. Looking forward, 2015 is expected to be another disappointing year for the largest economy in South America. Low commodity prices are expected to weigh on export revenues and the country is experiencing a severe drought in agricultural areas. In an effort to bolster confidence, newly-appointed Finance Minister Joaquim Levy has targeted a 1.2% primary surplus for 2015 and announced tax hikes and spending cuts. However, doubt remains as to whether the target is attainable. Levy faces a large amount of rigidity in the budget since the vast majority of spending is attached to constitutionally-mandated expenditure.

Economists are doubtful that the government will be able to quickly rekindle economic growth. LatinFocus Consensus Forecast panelists expect the economy to grow 0.5% in 2015, which is down 0.2 percentage points from last month’s forecast. For 2016, panelists see growth picking up to 1.8%.

MEXICO | Q4 economic growth less solid than expected

Following tepid growth in the third quarter, the latest data suggest that the economy did not perform as solidly as expected in the final quarter of 2014. Economic activity slowed in November, which reflected a deceleration in the industrial sector and survey data suggest that manufacturing output contracted in December. In spite of the robust U.S. economy, November exports grew at the slowest pace in 10 months, sending the trade balance into negative territory. The Mexican government unveiled the details of the first-round of bids for oil exploration in shallow-water blocks in December, thus confirming that the country is on track to open the energy sector to private investment. The blocks will be allocated as production-sharing contracts, the first of which are expected to be awarded in the second half of 2015.

Growth prospects for Mexico remain fairly positive, but downside risks to the 2015 outlook persist. Lower oil prices will have a negative impact on fiscal revenues and, if prolonged, the slump could reduce the attractiveness of some of Mexico’s most lucrative opportunities for energy investment, such as deep waters and oil shale production, both of which have high break-even costs. LatinFocus Consensus Forecast panelists expect the economy to expand 3.3% in 2015, which is down 0.2 percentage points from last month’s Consensus. In 2016, the panel sees the economy growing 3.8%.

ARGENTINA | Economy contracts in Q3 following stagnation in Q2

Argentina’s economy contracted 0.8% annually in the third quarter of last year following a flat growth in Q2. The contraction was mainly due to a sharp fall in private consumption, which hit a record low in Q3. Exports continued to decline, although at a slower pace than in Q2, while investment posted negative growth for the third consecutive quarter. Recent data suggest that the economy remains weak. Although economic activity increased somewhat in October, exports plummeted in November. The so-called RUFO clause finally expired on 31 December 2014. This means that the government is now able to negotiate with the holdouts without being forced to apply the same treatment to investors that entered the debt exchanges in 2005 and 2010. Most analysts do not expect an agreement any time soon.  The government has little incentive to pay holdouts in the near future as elections are scheduled for October and the country is already lacking access to international financial markets.

Against the current political and economic backdrop, Argentina’s economic outlook is quite uncertain. LatinFocus Consensus Forecast panelists see GDP dropping 0.4% in 2015, which is up 0.3 percentage points from last month’s forecast. For 2016, the panel sees the economy expanding 2.2%.

COLOMBIA | Economic growth moderates in Q3

Colombia’s economy slowed further in Q3, moderating from Q2’s 4.3% annual expansion to a slightly-weaker, but still solid, 4.2%. While slower private consumption and public spending were behind the deceleration, the external sector did improve. More recent indicators paint a mixed picture: Consumer confidence remained solid in November. However, industrial production was subdued in October and in November falling oil exports prompted the steepest decline in exports in over five years. The drop in global oil prices, which will likely weaken the energy sector and drive down public revenues, prompted the government to revise down its growth and fiscal targets for 2015. In an effort to contain the deficit, the government enacted a tax reform recently that extends and modifies existing wealth and profits taxes and also extends a charge on banking transactions. Meanwhile, the Colombian peso plunged to a five-year low in January on the falling oil price. Oil exports are the country’s key export and its most important source of foreign exchange.

Colombia’s economic prospects continued to weaken on expectations of falling oil revenues. LatinFocus Consensus Forecast panelists project the economy to grow 3.9% in 2015, which is down 0.4 percentage points from last month’s projections. For 2016, the panel sees economic growth of 4.1%.

INFLATION | Argentina and Venezuela push up inflation expectations

Inflation rose swiftly in 2014 due to higher inflation in Argentina and Venezuela. For 2015, inflation is expected to rise further, mainly due to expectations that inflation in Argentina and Venezuela will again end the year at double-digit rates. LatinFocus Consensus Forecast panelists revised up their inflation forecast this month. Forecasters now see inflation in Latin America ending 2015 at 13.3% (previous estimate: 12.0%). If the 2015 result is in line with the current projection, this will represent the highest inflation rate in two decades. On average, LatinFocus panelists expect the regional average to close 2016 at 10.8%.

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